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How does the government stabilize the economy?
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Through taxing and government spending
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How does the government stabilize the economy?
Through taxing and government spending
What economic school of thought are fiscal policies derived from?
Keynesian economics
Who founded Keynesian Economics?
John Maynard Keynes
Which variable of the GDP expenditure model is most responsible for a decline of GDP? (C + I + G + (X- M))
The business, or investment, sector (I)
What is the multiplier (a change in investment spending will have a magnified effect of total spending) in today's economy?
About 2 (ex: of investment spending goes down $50 billion, the decline in overall spending could reach $100 billion)
What happens to the GDP when the multiplier and accelerator (change in investment spending caused by ba change in total spending) go down?
The GDP gets pushed down
What can offset the business sector, I, to reverse a drop in GDP?
Government spending (G)
What does "priming the pump" mean?
This suggests that only a relatively small amount of government spending was needed to initiate a bigger round of overall spending in the economy.
What are some examples of an automatic stabilizer?
1. Progressive income tax (moving to a lower tax bracket which gives more money to spend)
2. Unemployment insurance (insurance for workers who lose their jobs for no fault of their own)
3. Entitlements (broad social programs that use established eligibility requirements to provide income supplements)
What three reasons are spending delayed?
1. Recognition lag - it takes time to understand how the economy is changing, meaning many months might pass before it's recognized that GDP has stopped growing
2. Legislative lag - it takes time to agree on the solution to an economic downturn (often a year or more to pass legislation)
3. Implementation lag - amount of time it takes for an approved spending project or tax cut to pump money into the economy & create jobs
What are the key goals for supply-siders?
1. Reduce the economic role of the federal government (cut the number of agencies)
2. The federal tax burden on individuals and businesses (lower tax rates)
What is the Laffer Curve?
shows the relationship between the size of the tax and tax revenue; reducing income tax rates would create a gain in tax revenue (meaning more taxes could be collected) despite lower rates
Supply-spiders predicted that lower tax rates and reduced government regulation would do what for the climate for economic growth?
Make it stronger
Is it true that tax cuts lead to higher tax revenues?
No
What are the similarities and difference between supply-siders and demand-siders?
Both have the same goal: increase production and decrease unemployment without increasing inflation. Demand-sliders want to achieve this by stimulating the economy based on the demand side, whereas supply-siders would use the supply side.
What supply do economists look at when analyzing the economy as a whole?
Aggregate supply (the total value of goods and services that all firms would produce, in a specific period of time, at various price levels)
What is the difference between price and price levels?
Price is just one good/service. Price levels are the price of everything produced in the economy.
What are the differences between aggregate supply and GDP?
They are the same thing (assuming all production takes place within a country's boarders)
What does an aggregate supply curve show?
The amount of real GDP that would be produced at various price levels
What happens to aggregate supply when the cost of production declines?
It goes up
If aggregate supply increases, what happens to the aggregate supply curve? (How does it shift?)
The AS curve would shift to the right
What happens to aggregate supply of the cost of production increases?
Aggregate supply decreases
What is the aggregate demand?
the total value of all goods and services demanded at different price levels
What does the aggregate demand curve show?
The sum of all consumer, business, government, and net foreign demand at various price levels
What happens to the aggregate demand curve if consumers decide to spend more and save less? (How does it shift?)
Aggregate demand increases and the AD curve shifts right
What happens to the aggregate demand if consumers decide to spend less and save more?
The aggregate demand decreases and shifts left
Where is the macroeconomic equilibrium?
The intersection of the aggregate supply and aggregate demand curves
What two major macroeconomic problems does AS and AD help us understand?
Inflation and recession
Daily Question: Which economists did we spend the most time discussing when you were asked to watch part of the documentary?
Keynes and Hayek
Daily Question: What is it when we are attempting to control the business cycle using spending and taxes?
Fiscal policy
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